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Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

An investor holds 400 shares of Vantage Global Energy common stock in a cash account, purchased at an initial cost basis of $75.00 per share. The company's board of directors declares a 3-for-2 forward stock split. What is the investor's adjusted cost basis per share in dollars after the split takes effect?

Answer: 50 USD

Answer

The adjusted cost basis per share following the 3-for-2 forward stock split is $50.00.
In a forward stock split, the total dollar value of the position remains unchanged (30,000.00).Witha3−for−2splitratio,theinvestorreceives3sharesforevery2sharespreviouslyowned,expandingtheholdingfrom400to600shares.Dividingthetotalcostof30,000.00). With a 3-for-2 split ratio, the investor receives 3 shares for every 2 shares previously owned, expanding the holding from 400 to 600 shares. Dividing the total cost of 30,000 by 600 shares yields an adjusted cost basis of $50.00 per share.

Step-by-Step Solution

1
Determine the total initial cost basis of the position prior to the split.
Total investment value = 400 shares * 75.00pershare=75.00 per share = 30,000.00.
Corporate actions such as stock splits adjust share quantity and price proportional to each other, maintaining the overall total dollar position value.
2
Calculate the post-split total share count.
New share count = 400 shares * (3 / 2) = 600 shares.
A 3-for-2 forward split increases the number of shares held by a factor of 1.5.
3
Calculate the adjusted cost basis per share.
Adjusted cost basis = 30,000.00/600shares=30,000.00 / 600 shares = 50.00 per share.
Dividing the unchanged total position value by the expanded share count provides the revised per-share cost basis for tax and reporting purposes.

Key Concept

Forward Stock Split Position and Cost Basis Adjustment
Estimated Time:1m 0s
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions